THE DISTILLERY: Rio recast

Many more column inches have been devoted to the departure of Rio Tinto boss Tom Albanese and the arrival of Sam Walsh as one of the world’s most powerful mining executive. The reason, as explained by one of Australia’s premier business columnists, is not just the statement about Albanese’s tenure, but the re-examinations that are currently being made on Rio stock all over the world.

The Australian Financial Review’s Chanticleer columnist Tony Boyd explains how this relatively simple story of one man getting another man’s job has such impressive hang time.

"A change in chief executive is often a catalyst for a significant stockmarket rerating, which is why Rio Tinto’s switch from American Tom Albanese to Australian Sam Walsh is the biggest story in global financial markets. Whether that rerating will occur is debatable, but the consensus among mining analysts on Friday was that Walsh’s appointment will usher in a period of improved capital management. That is often code for a greater distribution of cash flow to shareholders, either through buybacks or dividends. But that sort of speculation elicited nothing of substance from the company… At least one broker on Friday was speculating that a new approach to the company’s management of its annual cash flows of $US15 billion to $US20 billion could see the dividends double, but chairman Jan du Plessis told Chanticleer there would be no change in strategy.”

While Walsh is seen as a safe pair of hands, fresh eyes bring fresh perspective and the potential for change greatly increases. Fairfax’s Brian Robins asks whether it’s time to bring Rio back to Australia.

"It is hard to see just what the UK-based head office has brought to the table over the years – with the Alcan merger, and then pursuing a fruitless and embarassing merger with China to stave off an unwanted bid from BHP surely enough to reinforce to shareholders that 'absentee managers’ sitting in a remote location are no substitute for those with direct mine management exposure.”

At its heart, this is a story about personnel. Fairfax’s Adele Ferguson asks whether Rio Tinto’s share price might have risen even more on Friday had the company announced the departure of not just Albanese and strategy boss Doug Ritchie, but also a few board members.

"The Rio board remains intact. Four of the 12 directors were on the board when the company bought Alcan. One, Guy Elliott, has said he will leave at the end of the year. The chairman joined the board a year after Alcan. While the board might sheet the blame of the disastrous acquisitions to management, acquisitions of this size cannot be made without board approval.”

Business Spectator’s Stephen Bartholomeusz recounts the precise context of that decision, as many commentators haven’t given much weight to an explanation of why one of the world’s largest miners could throw such big cash at such rubbish.

"While there are some complicating strands to the explanation the simple answer to that basic question is that Rio paid too much for an acquisition that at the time represented 40 per cent of its market capitalisation. Before Rio and Alcan announced the agreed acquisition Alcan had been targeted by its arch rival Alcoa via a hostile $US28 billion offer. Rio didn’t just over-bid; it outbid Alcoa by an extraordinary $US10 billion. Its offer was 33 per cent higher than Alcoa – with far greater synergies in prospect – was prepared to pay and a remarkable 65 per cent premium to the all-time high for Alcan shares before Alcoa launched its offer. At the time there was speculation that BHP Billiton and Brazil’s Vale were also talking to Alcan but there has always been a suspicion that Rio paid the premium it did, and funded the acquisition with debt, because it was acutely aware that it was being stalked by BHP, which had just appointed Marius Kloppers chief executive with a mandate to go after Rio.”

Albanese has frequently been described as one of the unluckiest chief executives in recent history courtesy of his Alcan inheritance. But Fairfax’s Peter Ker reminds readers that the geologist turned mining executive actually secured a mega-deal that secured one of the world’s best mining assets next to its main customer.

"Under his watch Rio managed to avoid BHP Billiton's acquisitive clutches in 2008, and the company's most important and lucrative division – iron ore – performed brilliantly. Emboldened by the backing of his new chairman, Albanese set about increasing the company's exposure to a Mongolian copper deposit called Oyu Tolgoi, which was held by Canada's Ivanhoe Mines. He had initiated Rio's initial investment in Ivanhoe while serving as Rio's global resources chief in 2006, and he grew that stake until the company had majority control of Ivanhoe and Oyu Tolgoi in 2012. ‘He had the balls to take on the Oyu Tolgoi deal and internally [at Ivanhoe] we felt that him doing that deal saved his bacon the first time around,’ said Peter Reeve, the former chief executive of Ivanhoe's Australian offshoot.”

While the attention on Rio is understandable, there is, like, some other stuff happening.

Starting with Fairfax China correspondent John Garnaut, we learn that the Chinese economy, crucially important to Rio, has again defied the sceptics by strengthening noticeably in the second half of 2012, according to new figures.

Fairfax’s Peter Cai flips through a new book on two MIT professors that explores how countries starting from relatively similar positions develop at such vastly different rates.

"When Kenya gained independence from Britain in 1963, it was richer than South Korea in terms of per capita income. A half-century later, South Koreans are on average 28 times richer than Kenyans.” How does that happen?

And finally, The Australian’s David Uren says we should all keep an eye on the inflation figures set to drop on Wednesday, as they’ll probably be a defining factor for the Reserve Bank come the next meeting.

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